Real estate lawyers defend turf

Turf warrior: John O'Brien heads a group of lawyers that forced realty firm Koenig & Strey to drop a plan to offer legal services to home sellers. Photo: John R. Boehm

A group of local lawyers last week forced one of the Chicago area's largest real estate agencies to abandon plans to offer legal services to home sellers.

Wilmette-based Koenig & Strey/GMAC, the area's No. 3 broker with 600 agents sprinkled throughout the north suburbs and the city, stirred up a hornet's nest in February with an e-mail to its field force declaring that sellers don't necessarily need outside attorneys and that the firm's staff attorneys could handle the legal work for most transactions.

That got the attention of the Illinois Real Estate Lawyers Assn., a group of 700 small firms and solo practitioners who rely on real estate closings for a big part of their incomes. Interpreting Koenig & Strey's move as a threat to its members' livelihoods, the group late last month sent the realty firm a letter demanding that it stop the practice.

Illinois Attorney General Jim Ryan's consumer fraud bureau also confirms it has been looking into the matter, but will wind up the investigation now that Koenig & Strey is backing off.

That decision came at a meeting last week, in the face of the lawyers' threats to sue. Koenig & Strey President Christopher J. Eigel said the agency is "revisiting" its effort to provide legal representation to home sellers.

However, the forces that prompted Koenig & Strey to venture into the legal services arena are showing no signs of abating. Rising competition is holding down overall commission rates and forcing real estate firms to give individual agents a bigger cut. In an effort to offset that revenue pressure, firms are selling more ancillary services, such as title insurance. By cutting out independent lawyers who might recommend that sellers use rival title firms, Koenig & Strey hoped to snare more of that business.

'Power struggle'

"That was our motivation  not to supplant attorneys, but to enhance our title business," Mr. Eigel says.

Given that Northern Illinois' custom of independent legal counsel for sellers is less common elsewhere, it's likely that another realty company will try to edge the lawyers aside.

Koenig & Strey, a unit of Liberty Corner, N.J.-based GMAC Home Services Inc., has hired several attorneys for its title company in recent years. February's internal directive said that agents asked by sellers whether they need an independent attorney should refer them to Koenig & Strey Title, whose lawyers could handle their home-sale closings.

"Our title professionals will provide all the necessary components for the sellers to close their transaction without the use of an outside attorney," the memo states. "The only thing that we will not provide the sellers with will be a bill."

But after meeting with the lawyers group last week, Mr. Eigel says the firm will send agents a new memo repudiating the earlier one.

Real estate lawyers say Koenig & Strey's plan to handle legal work for sellers violated legal and ethical rules. First, Illinois law bars corporations from practicing law on behalf of individuals. Second, a lawyer paid by Koenig & Strey but representing a seller would face potential conflicts of interest.

"One (scenario) is that the lawyer (employed by the real estate agency) claims to be representing the seller, which is a conflict of interest," says Steven Lubet, a Northwestern University law professor specializing in legal ethics. "The other is that the lawyer makes clear she's not representing the seller, in which case the seller runs the risk of non-representation."

If the Koenig & Strey effort was round one of the struggle, chalk one up for the lawyers. But real estate law firms  typically small shops that charge a flat $350 to $450 to handle a real estate closing and must handle high volumes to compensate for low profit margins  believe the battle will continue.

"We think that the next time it pops up, it will be much more subtle," says John G. O'Brien, an Arlington Heights attorney who led the lawyers association's opposition to Koenig & Strey's program.

While most home sales close smoothly, the risk can be great if they don't  particularly at today's prices.

Risky business

"It may be that 15 years ago, transactions weren't that significant, but today, people are buying $600,000, $700,000 and $1-million houses," says George W. Spellmire, head of the professional liability section of Chicago law firm D'Ancona & Pflaum and a legal malpractice expert. "For people to enter into any transaction of that size without an adviser loyal only to them is risky."

Responds Mr. Woods of Keller Williams Realty: "This has been done in other states very successfully and has saved purchasers a lot of money."

But, he quickly adds, "I don't want to start doing battle with attorneys. That I don't want to do."